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Towards Competition in International Satellite Services:
Rethinking the Role of INTELSAT

In 1993, INTELSAT began to study its markets and operations
with the long-term objective of making fundamental changes to its
business structure. Many observers, including INTELSAT itself,
view the organizational rigidity imposed by INTELSAT's structure
as an international treaty organization as hampering INTELSAT's
expansion into new markets. The current range of restructuring
options considered by INTELSAT includes minor structural changes
(allowing multiple signatories, or de-linking investment and
use), formation of subsidiaries (both regional and commercial),
and privatization (into either a single entity or multiple
entities).

Restructuring proposals, however, raise the fundamental
question of whether it is appropriate for an entity such as
INTELSAT, with its close links to national governments, to expand
into new services outside its core mission. Indeed, perhaps the
reverse is true; perhaps INTELSAT should shrink rather than
expand its size and scope of activities. This paper addresses
this question from the broader perspective of global welfare, not
from that of INTELSAT's interests alone.

INTELSAT was created largely by national governments and
government owned telecommunications monopolists. We begin with
the premise that services should be provided by competitive
private entities wherever possible. Government intervention
should be confined to those services where there is a clear
market failure -- principally natural monopoly, or public goods
or other strong positive externalities. Do such conditions
characterize INTELSAT's markets today?

Section I of the paper reviews INTELSAT's original mission
and history, noting that INTELSAT was formed to provide global
telephone links via satellites. Whether or not private firms
could have adequately performed this task at the time, section II
notes that dramatic changes have taken place since then,
especially the growth of fiber optic cable as a substitute to
satellites for providing telephone links, and the emergence of
private satellite providers. The main barriers now to expansion
of private providers seem to be artificial barriers. These stem
largely from the special status enjoyed by INTELSAT and include:
its ownership of scarce geostationary (GEO) slots, its tax
preferences and immunities from competition laws, and, probably
most important, the restriction of access to national markets
imposed on INTELSAT's potential competitors by governments or
their telecommunications monopolists. Section III identifies
some of the potential inefficiencies from retaining the
privileged status of INTELSAT, and from allowing it to expand
into new services. Section IV concludes that it is time for a
fundamental reexamination of what is the proper role of INTELSAT
in today's world. Such a reexamination should not occur in
isolation, but in the context of a broader move towards
liberalizing international telecommunications markets so as to
permit increased reliance on competitive forces.

I. INTELSAT's Original Mission and History

A. Objective

The International Telecommunications Satellite Organization
(INTELSAT) was formed by international treaty in 1964 to improve
global communication, particularly between developing and
developed economies. As outlined in its governing Articles, the
treaty's objective is to provide reliable, high-quality
international public telephony on a non-discriminatory basis to
all areas of the world through development and operation of a
global commercial telecommunications satellite system.

B. Participants and Structure

By 1994, 132 governments had signed the treaty and INTELSAT
was providing international satellite services to more than 219
countries, territories, and dependencies. The INTELSAT
organizational structure has Parties and Signatories. Parties
are national governments that have signed the INTELSAT treaty.
Each country has one vote in the Assembly of Parties, the body
that sets policy and, in principle, conducts broad oversight.
Signatories are government agencies or, in some cases, private
companies designated as their governments' representatives in
INTELSAT. Signatories are represented on the Board of Governors
in proportion to their investment shares. The Board makes most
of the management, financial, and operational decisions for
INTELSAT.

The typical Signatory is the dominant telecommunications
service provider in that country. With a few exceptions, this is
a ministry of the government, such as the Ministry of Post,
Telegraph, and Telephone (PTT). Thus, in most countries (86%
according to one estimate), the same entity participates in
INTELSAT and controls access to the local telecommunications
networks. Moreover, while governments (i.e., Parties) in
principle have the ultimate oversight authority, in practice this
oversight may be weak: in most cases (92% according to one
estimate) Parties have assigned the Signatory as their accredited
representative in the Assembly of Parties.

C. Operating Characteristics

1. Control Over Use of Satellite Capacity and Pricing
Signatories apply to INTELSAT for use of its satellite
capacity. This capacity is resold to end users or used to
provide services by Signatories themselves (typically the PTTs).
Historically, direct access to INTELSAT had been available only
to Signatories. Although today INTELSAT permits direct access by
non-signatories, many countries have not yet availed themselves
of that opportunity (possibly because of explicit or implicit
understandings between governments and their Signatories
regarding the exclusive rights of Signatories to access). The
Board of Governors sets space segment charges (i.e. prices) on
what amounts to an internal transaction. However, there is no
requirement for these fees to be widely published and each
Signatory is free to set its own tariffs for sale of services to
end users.

2. Financing and Compensation Arrangements
INTELSAT Signatories make capital and pay space segment
charges to finance ongoing operations. Capital contribution and
compensation are proportional to a Signatory's investment share,
which is based on utilization of INTELSAT services and can change
over time. INTELSAT sets prices to achieve a target rate of
return on capital, chosen by its governing body. From 1973 to
1991 the organization's cumulative rate of return was 15.9%. The
target return on INTELSAT was set at 20% in July 1994. INTELSAT
has recently earned returns in nearly this high. These returns
were paid out to Signatories in proportion to capital invested.

The total rate of return on INTELSAT investments by
Signatories probably exceeds the direct compensation for use of
capital (i.e. 15.9% annual average rate of return over 1973-1991)
because, in most countries, Signatories also sell satellite
services to end users, often earning a profit margin also on
these sales. These pricing issues are discussed further in
Section III.

D. Privileges and Immunities

INTELSAT has privileges arising from being founded by international
treaty, such as exemption from taxation, and
certain legal immunities, including anti-trust exemptions.

II. Changes in the Economics of
International Telecommunications

Arguments for a role for governments in providing global
connectivity could reasonably be based on two possible
characteristics of international telecommunications services
either of which, if present, would inhibit efficient provision by
unregulated private entities. One such characteristic is natural
monopoly; minimizing cost then requires a single provider, but
an unregulated single private firm would price monopolistically
and lead to inefficiently low use of the service. A second
characteristic would be positive externalities, i.e. gains from
the relevant services accrue also to persons that do not pay for
their provision. When positive externalities are large relative
to the cost of provision, the market would drastically
underprovide such services. The extreme case is a "public good,"
such as national defense, where it is simply impractical to deny
the benefits of the good to those that would refuse to pay for
it. We review these issues below, concluding that efficient
private provision of global telecom services is increasingly
feasible.

A. Decline in Natural Monopoly Aspect
of International Telecom

Two key factors driving current changes in the provision of
international telecommunication are (1) the growing use of fiber
optic cable for international telephony, and (2) for services
that still require satellites, the increased possibility of
competition in satellite services.

1. Competition From Fiber Optic Cable
Technological change has produced dramatic increases in the
carrying capabilities of fiber optic cables, and allowed them to
begin to underprice satellites in providing connections for point
to point traffic over the international routes with the largest
traffic streams. Moreover, once fiber optic cable is laid, its
operating costs are probably no higher than those of satellite
transmissions. Fiber optic cable can carry the same
transmissions as satellites and is technically superior to
satellites for interactive service (e.g. voice) because satellite
transmission involves an echo delay. Accordingly, satellites are
losing to fiber optic cable much of the communications services
that can conveniently be transmitted by cable, especially
telephony.

2. Increasing Competition in the
Market for Satellite Services
For many telecommunications services, fiber optic cable
transmission is unlikely to become a good substitute for
satellite services, at least in the near term. (i) Telephony in
remote areas. Fiber optic cable does not reach all portions of
the world. While cable will soon connect most major cities in
the developed world and most major seashore communities in the
less developed world, the interior of less developed countries
(and perhaps also smaller cities and rural areas in developed
countries) is unlikely to be penetrated by fiber optic cable for
many years. (ii) Provision of broadband services to individual
users. Even when fiber reaches a region, the circuit must be
completed to individual users via the local telephone system.
Those "last miles" are commonly ill-suited to carrying broadband
(e.g. video and some data) services which require a capacity for
data movement that commonly exceeds even that of current fiber
optic technology. Consequently, satellite communications will
likely be preferred for broadband transmissions until technology
improves fiber's ability to carry broadband services. (iii)
Point-to-multipoint service. Satellites may have a significant
cost advantage over fiber optic cable for point-to-multipoint
broadcast or dispatch services because satellites eliminate the
need for multiple transmission. In sum, fiber optic cable is not
always a good substitute for satellites.

Before concluding that there is a continuing need for
INTELSAT, however, one should consider whether provision of
satellite services is a natural monopoly. The answer seems to be
no. Economies of scale in ground stations have decreased.
Initially, only powerful, expensive earth stations were able to
receive the weak signals transmitted by satellites. As satellite
signal strength has increased, this has allowed the size of
antennas to shrink; also, the price of transmitting and receiving
equipment has fallen. As a result, it has become cost-effective
for a greater number of users to own "earth stations" (sometimes
these are antennas only 18 inches in diameter that attach to the
side of a house) to serve their communications needs.1
Also, while INTELSAT in the early days might have possessed some unique
know-how about operating a satellite system, such know-how is now
more widespread, allowing for multiple providers of satellite services.

Independent satellite systems are carrying traffic once
handled almost exclusively by INTELSAT. One satellite services
provider, PanAmSat, is likely to compete globally with INTELSAT
soon in broad band services (with about one-fifth of INTELSAT's
capacity). Two other providers, Orion and Columbia, are soon
likely to cover 2/3 of the globe. In addition, regional
commercial satellite systems and governmental satellite systems
compete with INTELSAT in those national or regional areas that they serve.

B. Reconsideration of the Public Good Argument

Global interconnectivity of national telecommunications
systems facilitate improved commerce, better intergovernmental
relations, and increase the ability of individuals to
communicate. Today, however, private satellite organizations and
fiber optic cable connections offer many of the interconnectivity
services that INTELSAT was created to provide. The emergence of
private companies to provide interconnectivity increasingly casts
doubt on the "public good" nature of many of INTELSAT's core
services and therefore upon the continued need for a treaty
organization to provide them. Private firms now duplicate many
of the international communications links that previously only
INTELSAT provided. Furthermore, these firms offer this service
without the special treatment accorded to an international treaty
organization. In the case of fiber optic cable, plans show
continued construction in all regions of the globe, which will
only serve to increase connectivity.

Thus, examination of the natural monopoly and public good
aspects of international telecommunications suggests that, at
least with respect to INTELSAT's original core functions, these
potential reasons for government intervention have declined over
time. Correspondingly, public authorities should consider
reducing the scope of INTELSAT's activities to areas where either
natural monopoly or public goods arguments are valid, and
encourage reliance on competition in the remaining markets. We
discuss issues of universal access further in section III.

C. Artificial Barriers to Competition with INTELSAT

As discussed in the previous section, scale economies do not
appear to pose a major natural barrier to competition with
INTELSAT. In the short run, the fact that INTELSAT's potential
competitors in international satellite services are constrained
in their amount of available satellite capacity poses a barrier
to their expansion. But satellite capacity could be added over
time (perhaps requiring several years) and probably would, were
it not for other barriers to competition. The principal
remaining barriers in the long run appear to be artificial, and
relate closely to INTELSAT's special favored status.

1. Ownership of Scarce Geostationary Orbital Slots
There are approximately 180 geostationary orbital slots in
any satellite frequency band, though the precise feasible number
depends in part on system technology and the radio spectrum the
satellite employs. Currently, INTELSAT has registered plans for
31 slots and operates satellites in 23 of them.

Technical coordination for new entrants in GEO orbital slots
is becoming increasingly difficult as a greater number of nations
and regions launch satellites to serve their needs. A satellite
system using GEO orbits requires approximately three properly
positioned satellites to achieve global coverage. The scarcity
of slots over particular regions, such as the Atlantic Ocean,
would likely create the greatest difficulty for a new entrant
seeking to provide world-wide service in competition with
INTELSAT. Despite these concerns, it appears that potential
INTELSAT competitors have been able to obtain the necessary GEO
slots to operate their networks.

But entrants must coordinate their positioning and
operations with incumbents to avoid interference. INTELSAT's
widespread presence gives it the potential ability to delay entry
by dragging its feet in negotiations and, perhaps more
importantly, the negotiations over "coordination" might give it
insights into competitors business plans.2

2. Denial of Equal Access by Governments or Signatories
Denial of access on equal terms to national markets may well
be the primary remaining barrier to entry for private satellite
organizations. In general, a license is required for a satellite
services provider to gain access (i.e. acquire landing rights for
its signal) to a national market. In addition, to provide
switched-voice telephone service, a potential competitor must
also obtain access to the national public switched network (PSN),
a network often controlled by the INTELSAT Signatory -- typically
the dominant telecom provider.

3. Cross Subsidization, Tax Preferences,
and Immunities
INTELSAT's tax preference and certain immunities (e.g. from
restrictions imposed by competition laws) give it additional
artificial advantages over private potential competitors. In
addition, INTELSAT Signatories typically operate also in
regulated markets where they are subject to constraints on
profits, and may have incentives to circumvent such constraints
by cross subsidizing their operations in unregulated markets
(thereby shifting costs to the regulated markets and "justifying"
higher rates there). Such cross subsidization gives an
artificial advantage over competitors, as discussed further
below.

III. Arguments for a "Large INTELSAT" --
and Against

The changes described above suggest that the appropriate
scope of activities for an entity like INTELSAT, with its strong
governmental affiliation, has been greatly reduced. At least two
arguments have been advanced to justify the continuing need of a
"large INTELSAT" loosely defined here to include both a core
entity and any affiliate(s). These arguments are evaluated in
subsections A and B below. While the issues raised are
legitimate, other solutions are superior. As discussed in
subsection C, retaining a large INTELSAT has the potential to
spawn serious distortions.

A. Internalizing Network Pricing
Externalities Between Monopolists

Providing satellite links between countries entails a
network that requires both satellite facilities and access to
ground facilities in different countries. In many countries,
access to ground facilities is a bottleneck monopoly. It is well
known that separate monopolists of complementary products (here,
pieces of the network) will tend to overprice their products
relative to what an integrated monopolist would do. Absent
integration, any individual monopolist considers only the impact
on its own profit from raising its price, and ignores the loss in
revenue and profit that such a price increase would impose on
others by reducing demand for their complementary products (here,
due to decreased network utilization).

INTELSAT, the argument goes, mitigates such overpricing by
establishing some "vertical integration," which gives the
monopolists over ground segments a direct stake in satellite
profits and vice versa. This helps internalize some of the
negative externality between pricing of ground and of space
segments as compared with having an independent monopolist on the
satellite segment. There remains a substantial overpricing
incentive due to the fact that there are independent land-facility
monopolists in the different countries. Conceivably
INTELSAT helps mitigate this problem too, by providing a
convenient forum for reaching bilateral quid-pro-quo arrangements
whereby both countries reduce access charges. Correspondingly,
things could be made worse not better by restructuring INTELSAT
to delegate provision of satellite services to independent
entities that still possessed considerable market power. Such
market power might persist in the short run if satellite capacity
ownership and rights to GEO slots remain concentrated.

The goal, however, would not be to replace INTELSAT by
private satellite providers with market power, but by
competition. Competition would eliminate the need for vertical
integration between earth and space segments (integration that
INTELSAT only approximates) for the purpose of reducing prices of
satellite services.

The problem remains of how to mitigate the over-pricing
incentives arising from the existence of separate ground-based
monopolists in some countries. The first-best solution is to
foster competition in those markets wherever possible. Advances
in technology are making competition possible in many sectors
once thought to be natural monopolies; often the main remaining
barrier consists of government regulations. Some markets -- especially
smaller and less densely populated ones -- may remain
natural monopolies. The proper policy response there, however,
is national regulation of the access fees and terms that such
monopolies charge for interconnection to satellite services, but
in a manner that assures a globally efficient utilization level.

Reaching such a solution would likely require agreements among
governments, agreements that may not be easy to reach.3
But such access agreements would strike at the heart of the major
barrier to competition in telecom services more broadly.

Indeed, some would argue that introducing competition into
satellite services alone is only a part, perhaps a small part, of
the solution. Broader liberalization of telecom access terms is
desirable. We share this view. Also, some might argue that
there will be transition costs, as private providers learn to
make alternative interconnection arrangements to replace those
currently provided by INTELSAT. But this is only a transition
problem; private providers have proven adept at putting together
seamless networks in other contexts. Therefore we should not let
such considerations distract us from moving in the right
direction, of increased reliance on private sector competition
wherever possible, unhampered by regulatory and other governmental distortions.

A different argument for a large INTELSAT is that unfettered
market competition will leave certain segments unserved because
serving them on a stand-alone basis is unprofitable. Such
services, however, may still be worthwhile on grounds of positive
externalities of the sort used to justify universal service in
the first place. It is said that poorer countries in particular
will be left out in the cold if competition is permitted and
leads to "cream skimming." A large INTELSAT is allegedly
required to cross subsidize such uneconomical but socially
desirable services out of profitable activities elsewhere.
Therefore, the argument goes, it may be desirable to permit
INTELSAT's expansion, directly or through an affiliate, into
growing satellite markets such as video and other broadband
services that are commercially viable and were not within its
traditional purview (and that do not now represent the biggest
part of INTELSAT's traffic).

The argument that cross subsidies are justified as an
efficient way to provide global telecom services to developing
countries requires careful scrutiny. The cash-equivalent value
of such subsidies is probably relatively small; unrestricted
direct aid equal to this amount would seem to be a superior
route, as it would avoid potentially large distortions to the
global telecom industry.

An argument against such unrestricted cash assistance is
specific egalitarianism: according to this argument, assistance-in-kind
is superior for certain critical goods or services about
whose value the recipient is less informed than the donor. It is
difficult, however, to make a serious case that developing
countries do not recognize the value of global connectivity.
With or without cross subsidies, it is likely that most
developing countries will find it worthwhile to become connected
to global telecommunications. And while global connectivity
would not necessarily be provided to all regions within a
country, the policy choice of whether and how to encourage such
additional internal connectivity would seem to be best left to
countries themselves. Finally, to the extent one believes it
desirable to encourage further connectivity beyond the level that
LDCs would select, restricted cash transfers (earmarked for this
purpose) are probably preferable to subsidies via a distorted telecom industry.

A different type of argument for subsidizing global
connectivity to developing countries is based on the positive
externalities created for users in developed countries: the
value of a telecommunications network increases as the number of
participants grows. However, private providers can largely
capture ("internalize") such externalities by operating in all
countries. Indeed, private telephone carriers provide services
to numerous developing countries.

In short, advocates of the cross-subsidization rationale
should articulate precisely and document which worthwhile
services will go unprovided under competition. Evidence of the
absence of private provision in the current regime has to be
treated carefully -- many developing countries have never
welcomed private foreign telecom providers. Hence, it is
government regulatory policy rather than "market failure" which
often is to blame for the absence of some services. It is quite
possible that the truly "life line services" that would go
unprovided in a competitive regime would be fairly limited and
the "large INTELSAT" response is disproportionate to the size of
the underlying problem.

To the extent that certain worthwhile services would not be
provided under competition, the question remains whether it is better
to finance such unprofitable services through opaque cross
subsidies in the context of a quasi-governmental body like
INTELSAT than through more transparent mechanisms. (As an aside,
it is worth asking whether in fact INTELSAT currently cross
subsidizes in this "intended" direction.) Many economists would
argue that superior alternatives do exist or could be devised,
including, perhaps the creation of a universal service fund
targeted to particular countries or services, and which could be
used to procure service from the most efficient providers.

The need to find alternatives to cross subsidies (assuming
that these would be necessary) will in any case become more acute
as competition in global telecom is likely to increase over time,
making cross subsidies increasingly less tenable. Indeed, there
is a certain inconsistency in some of the arguments in favor of
an expanded INTELSAT. One the one hand, it is claimed that
INTELSAT will not exercise monopoly power, and will not therefore
interfere with the efficient functioning of these markets. On
the other hand, it is claimed that the revenues from these
activities are required for funding cross subsidization; bu if
these new markets will be truly competitive, then, seemingly,
there would be no rents to fund cross subsidization.4 We
attempt to examine more carefully in subsection C below the
likely direction of cross subsidization and resulting competitive
distortions.

C. Distortions Arising from a
Large INTELSAT

In response to declines in its "traditional" services
(notably switched-voice telephony that is increasingly provided
by fiber optic cable), INTELSAT is aggressively exploring new
services. These include private network (business) services, and
video broadcasts, such as Direct-to-Home (DTH) broadcasts.
Moreover, INTELSAT forecasts show the greatest opportunities for
growth in the delivery of these types of services. But
permitting an entity like INTELSAT to expand into potentially
competitive services, whether directly or through close
affiliates, can create a number of distortions. The precise
scope and quantitative importance of these distortions will vary
across countries, but the potential inefficiencies may be large
and depend, iter alia, on the details of the particular
regulatory regimes.

1. Limiting Access to Competitors
INTELSAT member nations (Parties) may have incentives to
limit competing satellite systems' access to their national
telecommunications networks in order to protect the profits of
their INTELSAT Signatories. Recall that these Signatories are
often government-owned PTTs or entities with other strong
government affiliations (PTT for brevity). Conceivably, a
government may have such incentives even if acting in the
national interest rather than that of its Signatory, in those
cases where the satellite services market would inherently remain
imperfectly competitive for technological reasons. In such
cases, denying access may yield more profit to the protected
domestic Signatory than it reduces consumer surplus. Such rent
shifting, however, harms foreign independent competitors and
typically reduces global welfare. A more likely scenario is that
denying access does not increase even national welfare, but only that of the PTT.

Severing the link between quasi-governmental entities such
as PTTs and the provision of satellite services or other
potentially competitive services is likely to reduce governmental
incentives to deny access for foreign competitors. First, in
many countries satellite services would likely be supplied
entirely by foreign providers, and the absence of domestic
producers would remove the incentive for inefficient protection.
Such a scenario is consistent with the observation that many
commodities are cheapest in countries that lack a domestic
industry, and therefore refrain from protectionism and instead
rely on free trade to deliver these commodities most
economically. Second, to the extent that there will be private
domestic producers, it is typically more difficult politically to
justify protection of such entities than protection of
nationalized entities. Of course, this argument suggests that it
would be a bad idea to force INTELSAT out of a particular service
but allow the PTT later to vertically integrate into such
activities.

Indeed, the PTT or other bottleneck monopolist may have the
incentive and ability to deny access for competitors even in
contravention of government wishes. Certain satellite services,
notably switched-voice telephony links, require physical
interconnection to a local network controlled by the PTT
monopolist. The latter can deny such links to competitors in
ways not readily controlled by the less-informed government or
its appointed regulators.

The wider the range of activities in which INTELSAT
operates, and therefore in which the dominant telecom providers
-- the INTELSAT Signatories -- have a financial stake, the
greater is the scope for denial of access to competitors, either
with or without the assent of national governments.

Correspondingly, expanding INTELSAT's range of activities may not
be in the global interest.

2. "Regulatory Evasion" through
Operations in Other Markets
A second class of distortions could arise from the fact
that PTTs often are constrained, whether explicitly or
implicitly, in the terms they can charge for core monopoly
services. Participation in other, potentially competitive
markets, such as through INTELSAT could allow them to circumvent
such regulation while introducing several inefficiencies.

Cross Subsidization and Discrimination: If the PTT is
subjected explicitly or implicitly to cost-based regulation, it
has incentives to evade regulation by cross-subsidization of
other, unregulated businesses. Some costs of those businesses
would be misattributed to "core" regulated functions, and used to
justify higher prices there. Such cost shifting would have two
deleterious consequences: it would increase prices in the
"regulated" markets, thereby aggravating the monopoly-pricing
distortions; and it would distort competition in the
unregulated, potentially competitive segment, reducing the market
share of potentially more efficient independent producers.

Observe that the incentive is to cross subsidize the
potentially competitive (unregulated) segments from the "core"
regulated natural monopoly segments. This is important, because
a main defense of a large INTELSAT is the need to cross
subsidize in the other direction, i.e., to use revenue from
unregulated sectors to fund deficits in "lifeline" natural
monopoly segments.5

Incentives for cost shifting/cross subsidization arise
primarily under cost-based regulation, and are less pronounced
under other forms of regulation such as price caps.

However, even in such a case there is a danger of allowing the
regulated entity to operate in unregulated but technologically
related markets. The monopolist could attempt to evade price cap
regulation on its core segment, and mandated interconnection
terms for competitors in the related markets, by practicing
technological discrimination against rivals, of the sort that
regulators find difficult to police. Denying access to
competitors would then enable the monopolist to extract its
profit in those unregulated markets, as AT&T was accused of doing
before its 1984 breakup when it allegedly offered only poor
connections to long-distance competitors such as MCI in order to
steer businesses towards its own long distance operation. Like
cost shifting, such technological discrimination against
competitors will distort competition in the potentially
competitive related markets. But it is more likely than is cost
shifting to raise rather than lower prices in the adjacent
markets, because the rival's ability to connect is impaired.

Several restructuring proposals being considered by INTELSAT
include provision of both new services and traditional services
from within INTELSAT. Proposals range from creation of a wholly
owned commercial subsidiary that could enter new markets, to full
privatization of INTELSAT as a single entity; but all raise the
specter of cross-subsidization of new services, or of
technological discrimination against competitors.

Technologically Unrelated Markets: Misuse of Immunities,
Tax Privileges, and Risk Shifting: Under its existing privileges
and immunities, INTELSAT is exempt from paying taxes. In effect,
this is a subsidy to INTELSAT to provide global connectivity.
Because it is not taxed on earnings, INTELSAT's effective cost of
capital is lower than that of its private competitors that pay
taxes. It could use this advantage to subsidize its entry into
new markets. By discouraging the development of competition in
new services, INTELSAT's actions would allow its Signatories to
earn abnormal profits in these new markets. In such cases, the
inefficiency stems from providing INTELSAT a subsidy larger than
is required to achieve the original targeted goal of global
connectivity.

Another potential distortion, which shares the flavor of
regulatory evasion, can arise from the fact that provision of new
services provided by INTELSAT will carry a combination of
technical risk and competitive risk. (For example, a service
called Satellite Business Service, formed by Comsat, IBM and
Aetna Life in 1975, lost over $500 million between 1979 and
1984, and was eventually sold.) Permitting INTELSAT to operate
in unregulated markets could provide excessive incentives to
invest in risky ventures. If a new service succeeds, INTELSAT
and its Signatories keep the profits. But, if the new service
fails, INTELSAT might be forced to raise rates for its
traditional services to pay for the losses. Many PTTs rely on
INTELSAT completely for interconnection to international and
might be able to argue to their national regulators have no
choice but to pay the higher rates. This asymmetric incentive
structure, of unlimited upside potential but limited downside
risk, creates incentives to make risky investments, similar to
the incentives of savings and loans in the United States in the
1980s. Consequently, if regulators cannot police where
INTELSAT's investments are going and are the investor of last
resort, INTELSAT and its Signatories would have incentives to
game the system and enter markets for riskier services.

IV. Conclusion

INTELSAT's core mission at founding was to provide global
telephone connectivity via satellites at a time when market
forces were perceived as unable to adequately meet this goal.
The world has changed substantially since then. There has been a
revolution in telecommunications. Competitive providers are now
increasingly able to supply what was once INTELSAT's core
business, telephony services. INTELSAT's proposed response seems
to be "we therefore must find something else to do." This
position is not convincing for good public policy. The time has
come for a fundamental reassessment of its proper role in the
world economy.

The arguments presented here do not preclude the possibility that
INTELSAT could spin off an efficient, competitive affiliate.
They do, however, indicate that the form of any residual links
between the two (or more) entities will determine whether the
restructuring can meet the competitive objectives that we believe
are of paramount importance.